Lowering taxes does not lead to lower consumer prices

On Monday 17 April 2023, the Council of State published its opinion on reducing the VAT rate on food to zero percent. It advises to abandon the proposal because it will only achieve the goal to a limited extent. After all, a zero VAT rate hardly leads to reductions in consumer prices.

The aim of the bill is to set the indirect tax on food at zero per cent for one year, which would make food cheaper by nine per cent in one fell swoop. However, based on domestic and foreign experience and empirical research, the bill is not expected to achieve its goal. This is because tax cuts on food products do not lead to reductions in prices. Entrepreneurs do benefit from reduced tax payments and the proposal then mainly has the effect of a 'supermarket subsidy'.

Benefit

Even if the proposal would result in lower prices for consumers, the benefit mainly occurs to consumers who do not need this reduction. Indeed, people with higher incomes spend more in euros on food than those with lower incomes. Moreover, a small price adjustment on food does not provide a solution for vulnerable consumers.

Enforcement and implementation

According to the initiators, the Consumer & Market Authority (ACM) should ensure that the VAT reduction is actually passed on in prices. However, there is no legal standard that the ACM can enforce and there are no means of enforcement. The proposal also raises questions in terms of practicality and several implementation tests are missed.

Temporary

It is plausible that the bill will not cause food prices to fall much, if at all, but will cause them to rise harder in the longer term by raising taxes again after a year. In the explanatory memorandum to the bill, the promoters do not address these effects.

Cost

The bill is expected to cost €5.6 billion. The initiators want to pay for this from the funds for the nitrogen problem, but do so without making the consequences for the government's policy intentions clear.

Given all these points, which are also difficult or impossible to fix, the Advisory Division recommends abandoning the bill.

Read the full opinion here (Dutch only)
Raadvanstate.nl